The Treasury yield curve flattened in the final quarter of 2014. Short-term Treasury note yields rose in anticipation of the start of the Federal Reserve's monetary tightening, which is expected to occur sometime in mid-2015. However, the yield on the benchmark 10-year Treasury note declined significantly amid strong demand for relatively high-yielding, safe-haven U.S. government debt, while the 30-year Treasury yield fell to the lowest levels in over 12 months. The U.S. economy grew at an annualized 5% pace in the third quarter, its fastest growth since the summer of 2003. After its December policy meeting, the Fed said that it would remain "patient" before raising short-term interest rates, relieving those who feared that a stronger economy would lead the central bank to raise rates sooner than expected.

The U.S. Treasury Intermediate Fund returned 1.53% in the quarter compared with 1.93% for the Barclays U.S. 4−10 Year Treasury Bond Index and 4.21% for the Lipper General U.S. Treasury Funds Average. For the 12 months ended December 31, 2014, the fund returned 4.39% versus 5.23% for the Barclays U.S. 4−10 Year Treasury Bond Index and 12.90% for the Lipper General U.S. Treasury Funds Average. The fund's average annual total returns were 4.39%, 3.97%, and 4.57% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2014. The fund's expense ratio was 0.51% as of its fiscal year ended May 31, 2014.

For up-to-date standardized total returns, including the most recent month-end performance, please click on the Performance tab, above.

Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results.
Share price, principal value, and return will vary and you may have a gain or loss when you sell your shares.

The fund invests at least 80% of its assets in Treasuries but maintains small positions in securities backed by the U.S. government, including Treasury inflation protected securities (TIPS) and Ginnie Mae mortgage-backed securities (MBS). TIPS provide some inflation protection, while our MBS holdings provide added yield over Treasuries, decent liquidity, and diversification for the fund. The fund's duration, which measures its sensitivity to changes in interest rates, was slightly shorter relative to the benchmark, as we anticipate higher interest rates in light of the strengthening U.S. economy and a less accommodative Fed.

The U.S. economy continues to gain traction despite signs of slowing growth in Europe, Japan, and China. The Fed ended its longstanding monthly asset purchase program in October, but it is too early to conclude that the U.S. economy is strong enough for the central bank to start raising short-term rates. We expect the improving U.S. economy to put upward pressure on interest rates, but recent dollar strength and a benign inflation outlook will likely continue to sustain strong demand for Treasuries and help restrain a rise in U.S. yields. Moreover, further monetary easing by the European Central Bank to combat flagging growth in the eurozone could also hold down longer-term yields globally.

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